Sean O'Grady: Any reduction in America's credit rating will affect every person on the planet

Pretty much every bank, national treasury, pension fund, insurer and mutual investment fund in the world has got some money tied up in United States Treasury bonds. They are by far the most widely held, actively traded and liquid financial asset in the history of the world. So even the slightest devaluation of them from the current premium "AAA" rating will affect almost every human being on the planet.

US government debt has become so substantial that there is now the small risk it will one day become unsustainable. A debt of these proportions threatens to overwhelm the economy's ability to service the debt. It is also overwhelming America's political system. Thus far, indeed, the US has been fortunate that ultra-low interest rates, extensive purchases by the Federal Reserve, and the seemingly insatiable demand for Treasury bonds by foreigners – especially the Chinese – has allowed America to exercise this "exorbitant privilege".

But if foreigners require more interest to compensate for the risk of lending Washington money, then the interest rate paid by US businesses, households and government will rise, as President Obama has warned. They may not, as he said, "sky-rocket", but they would have to reflect new risks. That, in turn, means Americans will have less spending power with which to buy Korean televisions, German cars, Chinese toys, Scotch whisky and the rest. The US's role as "consumer of last resort" to the world would be drawing to a close. That, in turn, means slower growth elsewhere.

Then comes the impact on financial institutions. In broad terms, if their reserves of US Treasuries are devalued, banks will be able to make fewer loans, and another twist in the contraction of credit will happen. Pension and savings funds will reduce in value and consumers will be poorer. That, in turn, will mean less willingness and ability to spend, another recessionary force the world can well do without.

Last is the possibility of a panic such as we saw in the case of distressed eurozone economies. That could turn a relatively modest trimming of world wealth and economic activity into a slump.

Now, usually when a slump threatens, the US steps in to spend and save the world economy, like a financial superhero. If the superhero is vanquished, there is no other power able to do that, except perhaps for China. Yet China has more of her wealth tied up in US Treasuries than anyone – $2 trillion-plus.

Like two drunken giants trying to support each other, the world must fear being crushed if – or when – America and China trip and fall. They're looking increasingly unstable.